The mode of incorporation of lithium (Li) (as substitution or interstitial position) in zinc oxide (ZnO) has its own importance as far as the potential applications of Li-doped ZnO nanoparticles (NPs) are concerned. Fabrication of p-type ZnO-based semiconductors as well as defect engineering-based applications demand substitution of Zn2+ by Li+. However, doping of ZnO by Li with interstitial positions can play an important role in controlling different properties of it. In the present study, we report the successful doping of Li in ZnO NPs up to a Li concentration of 10 mol% employing a simple wet chemical precipitation method in water. Up to a Li concentration of 8 mol%, doping by substitution of Li to the Zn sites has been observed. However, for 10 mol% of Li concentration, doping by incorporation of interstitial sites in addition to the substitution has been confirmed through complementary characterization techniques. The effects of interstitial Li in ZnO on structural, optical, and antimicrobial properties have been studied in detail systematically. For all the cases (structural, optical, and antimicrobial), the properties of Li-doped ZnO NPs have been changed reversibly in the ZnO NPs after the incorporation of interstitial sites by Li as compared to the substitution of Li. For example, the microstrain, band gap, and antimicrobial activity have been found to increase with the increase in Li concentration up to 8 mol%. However, the microstrain, band gap, and antimicrobial activity are found the decrease for 10 mol% of Li as compared to 8 mol% of Li. This study indicated that the different properties of Li-doped ZnO NPs can be controlled suitably as per the requirements for the practical applications of ZnO-based materials.